Until recently, the bulk of the attention on the insolvent North American oil and gas sector fell squarely on the US. That is starting to change for two reasons: first, Canada's regulator just ended the cute game (first profiled here) Canadian banks had been playing for years by reserving zero of their potential loan losses to the collapsing energy sector; second, slowly but surely Canadian oil and gas failures are starting to become a daily reality; failures such as that of Canadian junior oil and gas producer Terra Energy Corp which yesterday said it shut down production, ceased operations and announced the resignation of directors and officers on Monday, after its lender, Canadian Western Bank, demanded full repayment of its debt.
And that's all it takes: one simple debt acceleration, which has led to the shuttering of Terra, and which would send thousands of insolvent energy companies into bankruptcy overnight. For now, most such insolvent companies continue to exist as zombies, many of which can't even afford an interest payment, but which after the direct intervention of the Dallas Fed and the OCC (which as we exclusively reported bought the insolvent sector a brief reprieve when it demanded that banks not force debtors to repay) continue to exist as the Fed is terrified of the default tsunami that would be unleashed once the bankruptcies finally arrive, as they will.
As for the now defunct Canadian junior, according to Reuters, Terra, which was producing around 3,600 barrels of oil equivalent per day from its operations in western Alberta and north-eastern British Columbia, said that at current low oil prices the cost of operating was more than its revenue.
Reuters adds that since September 2015, Terra has sold off around C$12 million in oil and gas assets to help pay down debt, but clearly the amount was not enough to cover all its liabilities.
Terra also said the asset sales in Alberta were hampered by the company having a liability management rating of below one - the ratio that regulators use to assess whether a company's revenues cover the cost of fully reclaiming all its oil wells.
Liability management ratings and oil well liabilities are becoming an increasingly hot topic in Alberta, where lawyers have warned buyer concerns over reclamation costs tied to inactive wells are disrupting energy asset sales.
The company is the latest Canadian producer to fall victim to the prolonged slump in global crude prices.
This happened after one bank decided that throwing good money after bad is no longer feasible, no matter how much pressure US or Canadian regulators put on it, namely Canadian Western Bank, which served notice on Friday demanding repayment in full of the C$15.9 million ($12.18 million) owed by the company by March 28.
"The company's lender has declined to provide further financial support to Terra and there is no other means of financing available to the company at this time," Terra said in a statement on its website.
The ironic thing is that the lender knew the recovery on its loan will be negligible - if any - and yet it still pulled the plug, refusing to comply with the charade that "all is well" any more. According to Reuters, Canadian Western Bank has not announced a receiver to sell Terra's assets. A source with direct knowledge of the matter said no receiver had been appointed because Canadian Western Bank is concerned the receivership process would not be worth the cost to the bank.
That's right: the bank believes it would spend more on the process of liquidating Terra than it would collect in the end of the day.
"They are worried they will not find any (asset) purchasers because of economic and regulatory problems," said the source, who declined to be named because of client confidentiality.
Canadian Western Bank declined to comment on the matter; after all what can it say - "we should have defaulted Terra much earlier when we still had a chance of recovering something?"
Prepare to hear this lament far more often in the future as banks ask themselves why they allowed zombie shale companies - like Terra - to pretend they are alive for as long as they have.